Analysis of the Scheme of Arrangement of the Vodafone-Idea Business Combination

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The British telecom major, Vodafone and Aditya Birla group-run Idea Cellular had announced their merger on 20th March, 2017. It is one of the biggest mergers in the history of telecommunication industry. Vodafone and Idea finally completed their deal on 31st August 2018.

Highlights: Rationale behind the merger

  1. The merger would help in expanding the business of the companies eventually increasing the market value of the shares owned by the shareholders and all other stakeholders.
  2. The vision of Digital India can be achieved as the services of the company can bring benefits to the customers.
  3. To harmonize the sales and service channels.
  4. It would also help to streamline of various regional and nationwide information technology systems
  5. To reduce cost and earn profit.
  6. For synergies in operational processes and logistics alignment leading to economies of scale.
  7. For productivity gains arising out of the financial, technical and human resources of the company.

Market Share after the Merger

Vodafone-Idea is currently the largest telecommunication company in India. Having about 400 million customers the merger is gaining a huge market share. The revenue share is about 41.2 percent in the market.

Deal Structure

  • Idea Cellular Limited shall issue and allot to the equity shareholders of Vodafone Ltd, an aggregate number of equity shares of Rs 10 each of Idea Cellular Limited on completely Diluted basis.
  • The authorized share capital of the company is Rs 302,930,020,000 divided into 28,793,002,000 equity shares of Rs 10 each. 1500 redeemable cumulative non-convertible preference shares of Rs 10,000,000 each with rights and privileges.

Shareholding Pattern

  • Each Idea Cellular Limited promoters and Vodafone Limited promoter shall be categorized as a “promoter” of Idea Cellular Limited.
  • The shareholdings pattern of Idea is based on the contribution of agreed levels of debt by the Vodafone Limited Merger group and the Idea merger group.
  • The Vodafone Limited promoters shall hold 45.1% of the equity share capital of the Idea Cellular Ltd and the ISL promoters shall hold 26.0% of the equity share capital of Idea Cellular Limited in each case on a fully diluted basis.

 

Benefits to the combined entity

Merger of debt-ridden firms Idea and Vodafone India is expected to bring down cost of their operations and give them relief from cut-throat competition in the market where margins have hit rock bottom with free voice calls.

Idea will infuse Rs 67.5 billion with Vodafone’s Rs 86 billion. Additionally, the monetization of standalone towers of both companies will yield a value of Rs 78.5 billion. The company claims that it is now the largest voice network with over 200,000 unique GSM sites and has 235,000 km of fibre to cover over 1.2 billion Indians (92% population). Other than that, the new entity will have a large spectrum portfolio and more broadband carriers to provide better service on 2 G, 3G and 4G platforms.

They estimate operational expenditure related synergies of $600 million to be achieved in year ending March 2019, followed by additional saving of $300 million in fiscal ending March 2020. Vodafone-Idea had projected $1.3 billion as operational expense-related savings from the merger of India’s second and third-ranked operators.

Volatility in the market

Analysts at JM Financial Institutional Securities Ltd estimate that the combined entity’s annualized profit stood at merely ₹ 7,270 crore in the June quarter. Vodafone Idea’s net debt, meanwhile, is about 15 times its profit. At the time of the merger announcement in March 2017, the net debt to EBITDA ratio was at roughly 4.4 times.